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Edited Transcript of ETEL.C earnings conference call or presentation 8-Aug-19 1:00pm GMT

Q2 2019 Telecom Egypt Co SAE Earnings Call

Cairo Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Telecom Egypt Co SAE earnings conference call or presentation Thursday, August 8, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adel Hamed

Telecom Egypt Company S.A.E. - CEO, MD & Director

* Mohamed Hassan Shamroukh

Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director

* Sarah Shabayek

Telecom Egypt Company S.A.E. - Head of IR

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Conference Call Participants

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* Alexander Vengranovich

Renaissance Capital, Research Division - Analyst

* Dalal Darwich

Arqaam Capital Research Offshore S.A.L. - Research Analyst

* Hassan Abdelgelil

CI Capital Research - Analyst

* Mariam Wael

Pharos Research - Analyst

* Omar Maher

EFG Hermes Holding S.A.E., Research Division - VP of Telecom

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Presentation

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Operator [1]

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Good day and welcome to the Telecom Egypt Second Quarter 2019 Results Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mariam Wael, Equity Analyst of Pharos Holding. Please go ahead.

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Mariam Wael, Pharos Research - Analyst [2]

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Good afternoon, everyone. This is Mariam Wael. On behalf of Pharos Holding, we are very pleased to be hosting Telecom Egypt's first half 2019 results conference call. And we would like

(technical difficulty)

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [3]

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Hello?

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Mariam Wael, Pharos Research - Analyst [4]

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and Ms. Sarah Shabayek. Hi.

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [5]

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Hello, hello, hello. Yes. Are you -- the line broke for a second. You can continue, Mariam.

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Mariam Wael, Pharos Research - Analyst [6]

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Okay. And Mr. Mohamed Shamroukh, CFO; and Ms. Sarah Shabayek, Investor Relations Senior Director.

With no further delay, I'd like to pass on the call to Sarah to begin the presentation.

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [7]

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Thank you, Mariam, and thanks to Pharos Holding for hosting this quarter's conference call. Good afternoon and welcome to our second quarter 2019 earnings call.

We will start the call with a briefing of the operational performance in the quarter presented by our CEO, Adel Hamed; followed by the key financial highlights presented by Mohamed Shamroukh, our CFO. Kindly note that the presentation is available on our IR website under the Quarterly Results section of the Financial Estimation tab on ir.te.eg.

Without further delay, I would like to draw your attention to our safe harbor statement. We may make some forward-looking statements in the course of this conference call. These statements will be based on the information available to us as of today, and you should, therefore, not assume in the future that we'll continue to hold these views. We do not commit to notify you as our views change. We refer to our public filings for some factors that may cause forward-looking statements to differ from actual future events or results.

I will now hand over the call to Mr. Adel Hamed.

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Adel Hamed, Telecom Egypt Company S.A.E. - CEO, MD & Director [8]

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Thank you, Sarah. Good morning and good afternoon, everyone. Thank you for joining our call today.

This quarter's results are reflection of the successful execution of our strategy to monetize our investment across all business units. Our top line grew 24% year-over-year, reaching EGP 6.6 billion, thanks to the continuously growing demand of our data products followed by the recognition of a new cable project, PEACE.

Our customer base is also on uptrend with an 11% year-over-year growth in fixed line customer, a 19% year-over-year increase in fixed broadband customer and a 29% year-over-year increase in mobile subscribers. It's also very important to highlight that although mobile customer are flat Q-over-Q, mobile revenue increased by 15% Q-over-Q.

I'm also very pleased to be able to tell you today about the most recent shift in our fixed broadband offering, which comes in line with our huge project to develop our network capability and improve the quality of Internet service in Egypt. On the first 1st of July, Telecom Egypt launched WE SPACE, which is our new broadband platform, including high-speed Internet bundles with maximum speed that starts from 30 megabit per second instead of 5 megabit per second, allowing our customer to reach the maximum speed available in the network for their lines. This move is expected to have a positive operational and financial impact and, therefore, allow us to reap the fruits of our strong network investment and to further develop the broadband market in Egypt.

We have more project in the pipeline in light of our strategy to become a total ICT provider in Egypt. And I intended to walk you through our WE Wallet offering and -- as well as our IPTV platform services in the next quarter's call. We have completed the groundwork for both products and regard these launches as crucial on our journey to cross beyond traditional services into new investments.

Our success is not only limited to the retail offering. This quarter, our IC&N revenue has been a spike on the recognition of the USD 20 million from the PEACE cable agreement signed in April with additional ancillary services revenue to come over the lifetime of the cable. We expect to see more of these project in the future as they represent the pace of the next stage of transforming the country into a digital hub and strengthening our position as a local and international partner of choice.

With that, I have come to my end of this operational brief. I will now hand over the call to Mr. Mohamed Shamroukh, our CFO, to discuss this quarter's key financial trends (inaudible).

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [9]

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Thank you, Mr. Adel. Good morning and good afternoon, everyone. I'm not -- is that -- yes, is that by now everyone is familiar with our quarter investor presentation. So I will keep my commentary brief and to the point to leave room for more questions from your side.

Data continues to drive our revenue growth for both fixed and mobile revenue. This is not only due to our growing customer base, but also a healthy trend of ARPU growth. And also to meet the growing appetite for data services and SaaS opportunity in the market, we have accelerated our investment in the infrastructure. This has resulted in increased CapEx spending in the first half 2019 but overall, within our announcement guidance.

On the other hand, we are focusing on implementing various cost cutting and optimization initiative. This quarter, we successfully completed the Early Retirement Program, so totaling around 2,000 employees, and we reported EGP 1 billion as one-off expenses that will be paid to employees in the third quarter. We expected to finance around 50% of that amount through the extraordinary dividend that is expected to be paid by Vodafone Egypt in the same quarter. It's important to note here that the distribution is in addition to EGP 700 million that are to be paid by Vodafone Egypt in June 2020.

In line with the agreements that we announced in March this year, normalizing for the effect of the Early Retirement Program, our EBITDA margins for the second quarter would have come in at 26% and for the first half at 29%, at the higher end of our guidance.

Finally, I would like to point out that our restructuring continues to be off with our effective interest rate declining further to 6.9% in the second quarter, down from 10.3% last year.

By this, I reached my conclusions and my comments. And now I will open the floor for the Q&A session from your side. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take the first question from the line of Alexander Vengranovich from Renaissance Capital.

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Alexander Vengranovich, Renaissance Capital, Research Division - Analyst [2]

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I have a couple of questions. So first one on your mobile subscriber base. If I look at the second quarter dynamics, I've seen that there was a quite substantial deceleration of the growth in number of the subscribers quarter-over-quarter. Can you please explain how do you expect to boost it in the future? What's going to be the drivers for the mobile subscriber base? And what sort of measures you're planning to implement to accelerate again? So that's the first question. Second one, are you planning or maybe you're offering already a fixed-to-mobile conversion bundle for the subscribers who are also using your fixed voice and data services? And the next one, also, do you have any measures in place which help you to avoid the competition in mobile with Vodafone Egypt, which is your associate company?

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [3]

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Okay. So I'll take the first question. It's important to note that in the second quarter, we've seen a cleanup in the subscriber base. As you know, we've launched a little bit more than a year ago. We had a lot of idle customers over this time. And this is basically, what you see is the impact of such cleanup in Q2. We have hinted in our presentation that although it looks like customers are flat, we've seen a 15% growth in mobile revenue. This is basically because of the growth additions that came in as well as the very healthy ARPU trends relating to high-value customers.

This leads me to your second question, actually, because our strategy has shifted a little bit over the last year where initially we used to sell our SIM cards and mobile services to the masses irregardless of whether this is high-value customer or not or a data customer or not. But now our vision is more focused, and we are trying to push more the postpaid conversion bundles that includes fixed data on not only mobile. And as you know, this time, this is a very different dynamic than the usual mobile operators, and we believe it will be very -- it will result in very healthy revenue growth that is more based on long-term commitments with our customers rather than the usual prepaid behavior of the mobile market in Egypt.

And the last question is about how we avoid competition with Vodafone Egypt. We don't necessarily do that in specific, but the result of our strategy of focusing on the -- our customers in fixed data and focusing on the conversion product, this has led us by default to avoid competition with Vodafone, which has a very different type of customer. 95% of customers at Vodafone Egypt are prepaid, and they're not to do a dual pay customer. Also, Vodafone Egypt tends to have a very loyal customer base that has a lot of other benefits than the traditional telecom services. We still haven't moved into that direction yet, although we want to in the future. And so it's kind of different dynamics within the same market.

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Operator [4]

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We will take the next question from Hassan Abdelgelil from CI Capital.

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Hassan Abdelgelil, CI Capital Research - Analyst [5]

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I have a couple of questions. The first one is related to income from Vodafone. I know that you guys don't share much about the Vodafone due to the agreements that you have. But can we expect this to recur because income, it is trending down I think around 90% every year? As for the amount (inaudible) should we expect ForEx loss?

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [6]

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Again, for the income from Vodafone, it's interest expenses reduced the leverage [of debt because of] the distribution of the dividends. And as there's some management guidance from Vodafone side, we are expecting -- they are expecting to close the total amount of leverage in 1 year time. So by Q1 2020, they are expecting to close a total amount of debt they borrowed for financing of the [dividend] distribution, which is 1 year operation from Vodafone Egypt side.

For FX, again, it's -- for this quarter, it's around EGP 400 million. Yes, we'll still carry our liability in hard currency in our balance sheet. So if any movement in the opposite direction, we might incur some FX losses as well. We do not see and we do not expect this to be happen, but we are moving in our -- again, if we calculate this -- the differences even with the FX losses that we might incur with the effective interest rate we currently incur in our income statement, it would have been in a different position for hard currency and Egyptian pound. It's still positive on the trends if that's so. I mean FX, again, if it happens, will be much more lower than the interest expenses that will have been incurred if we borrowed in Egyptian pound. So our breakeven point is still pretty high, which is 2020 pounds per dollar, which is very far from the current position of the Egyptian pound (inaudible).

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [7]

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Hassan, it's also very important to note here that in any opposite direction will lead to higher revenues in the international wholesale as well. So net-net, it wouldn't be a direct

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Hassan Abdelgelil, CI Capital Research - Analyst [8]

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Okay. So I just wanted to get to the rates that you just said for Telecom Egypt in 2020. Can you please repeat this?

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [9]

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No. He means EGP 22 is the breakeven point for Telecom Egypt. If you compare, there's the interest expense and the efficiency we've done on interest compared to the FX exposure.

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Hassan Abdelgelil, CI Capital Research - Analyst [10]

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Okay. So yes, more than EGP 22 would be negative for Telecom Egypt, right, is what you mean?

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [11]

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Yes.

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [12]

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Yes.

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Hassan Abdelgelil, CI Capital Research - Analyst [13]

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Okay. If I may add just one more question. I think at least my expectation for the cable products will be for around $20 million, [of it came $56 million]. Were the $16 million sort of related to the first project or just another project that was not disclosed before? Can you give us more details on this?

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [14]

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I'd try -- I would like to differentiate between the type of project. During first quarter, we did recognize the crossing project, a new type crossing, which is selling a right of way for using the infrastructure, domestic infrastructure in Egypt for crossing of someone in cable doing the (inaudible) This the PEACE cable, which you will recognize a $20 million, and it's coming at a very high margin.

In the meantime, we sold our West segment in our key north cable system and the merchants of our segment, the insurer, it comes -- even if it's an -- right of use for a long term, it comes to us as the same margins of capacity. Yes. It has been recognized under project revenue, but it's different in nature between the type of projects that we recognized both leverages, the domestic infrastructure for crossing cables or transit cable between east and west, between Red Sea and Mediterranean. And supposing that our subscriber revenues that recognize under project revenue which is selling a right-of-use for a capacity on -- into our [P&L] cable systems on the west segment. It's different and it seems west comes with the same margin of capacity. So this is a problem of making confusions between our different projects. This nature of project that it's totally different from the number of projects that we recognize from crossing. It was a matter of selling a fiber pair on to your north system cable.

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Operator [15]

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We will take the next question from the line of Omar Maher from EMG (sic) [EFG].

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Omar Maher, EFG Hermes Holding S.A.E., Research Division - VP of Telecom [16]

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I have two questions from mine, please. So first of all, on the new bundles that you launched, the SPACE one. I know this is post quarter, basically. But I was hoping if you could give us a sense of how the uptick has been -- how the demand has met the new bundles. The structures are obviously simplified. You've raised the minimum speed to 30, I believe. But at the same time, you still have some infrastructure challenges on the last mile, basically, in certain areas that which, I guess, would hamper the ability to fully monetize the upgrades of the packages. So if you could just give us a sense of how you've dealt with this and how the demand has been, given that this quarter, specifically in 2Q '19, we saw a bit of a slowdown in the growth on the home services business unit Q-on-Q compared to previous quarters. That's the first question. And the second question is actually on the IPTV product that you were planning to offer now. You've talked about this for quite some time now. I believe we started hearing about it earlier this year. And I'm guessing that the plans or maybe the initial plan was to launch it a little bit earlier. It seems like it's been delayed a little bit. Are you facing any challenges on that front or not? And what is -- why is it taking so much time for it to be launched? And yes, I think it's a bit early obviously to talk about the potential. But also, if you could shed some light on where you expect this to go within a year's time. Maybe if you end up launching it in 4Q, where do you expect it to be by the fourth quarter of the following year?

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [17]

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Thanks, Omar. Actually, for the new bundle, WE SPACE, I'd just start with the monetization issues that you mentioned about challenges we have into the last mile that will be a bottleneck for the speed received from the customer side. Yes, there's a challenge since the last mile, which is based on cover is still an issue for Telecom Egypt. But internally, there are some operational implications for how some of the monetization of the infrastructures is going right now.

Before, the average quota per customer was like 100 gig per month, and the access days for the customer was like 26 days. So on a nutshell, you spend 26 days to consume your giga and then you downgrade the speed to 1 meg, you have an accessibility to Internet at a lower speed. And the number of people that were make an -- top-up for additional quota was very limited. It's less than 100 out of the 5 million customer base at the time we have. Currently, when we upgraded the speed, which is 30 meg, despite it's not that -- might not be received across all the customer base at the level of speed I mean, but the access base, if you compare to it before, if would -- been less by like 7 to 8 days. So now the access is like 20 days. So -- and the customer will be processed at 256.

We increased the quota for 40 to accommodate so the customer experience would be much more better. But still, we see that people will not accept that level of speed even with us, and despite the fact that these actions in the last mile is to subscribed for the WE SPACE super 2, which is 250 gigs instead of the 140 gigs. And this is the black horse of our product. This is the ones that we need to push for. Because in terms of money, it's not big difference between the current -- the old price that the customer were paying before. There's some uplift for Telecom Egypt, but it's not more of money paid from the customer side.

On the other side, the cross adds that we faced declined during the second quarter when we decided to sell the router to, of course, subscribe and get has been, again, catched up when we started to offer the products. Because in the last month, for example, there was an upside by 25% to 30% Internet adds compared with the previous months before launching off the WE SPACE.

So we're expecting increase on the sales, and we are expecting people that with that too will be much more entitled to top up again to be able to access the Internet. Because currently, the access days would be like 22 days instead of 26 to 28 days. And the success link will be 256 gig in a state of 1 meg. Now this is 1 type so people will whether top-up to have more gigs, also will much prefer the higher speeds, which is WE SPACE 2, super 2, which are selling 250 gig and at EGP 175, which is not big difference from the money which have been paid before, which is EGP 150, which is EGP 25 upside for telecoms.

But this is from (inaudible) front. For the speed, again, coming -- during this month, so we will (inaudible) router, which will change a lot -- the PTS and the router, which is another technology, replacing the FTTH and router would be a fill to some market at a fairly competitive price based on an installment basis and would be much more of an essentially to Telecom Egypt on the financial side. As you know, we were subscribing 100% of the router price this year.

So this is in a nutshell what we are doing. Still, we have to add more fiber, which we are expecting to close by June 2020. On parallel, we have market 2 million units in Egypt for the high-end customers where we believe FTTH will be a second phase of cascading instead of working on the enhancement of the quality of the government workers. This locations is all of us knows it very well. It's a high-end location in Egypt, which is (inaudible), which we all know people will ask for more and more and will be hungry for more and more data consumption.

PEACE and FTTH plan will support in our monetization strategy and are bringing more high packages to speed. On the other side, we have awarded, as you know, we finalized it both site, and we have been recognized from all governmental offices for the achievement to us that we deliver the digital infrastructure for both site in less than 2 months, which we did recognize around EGP 100 million during Q1, if I remember correctly, for tax revenue.

We have been awarded the other service and the other governments in Egypt from the government, which we are expecting to see a good income for Telecom Egypt. So there has been a received from the government side last week a plan which would -- we are planning to take 1.5 years, which will be support to us in the implementation of FTTH because we are not paying for a right of way and pay for permission and taking street when we are working on potential transformation project to leverage this digital transformation project and speeding up our FTTH rollout without paying more additional costs for getting permission from the government side. It is our plan to work on the enhancement of the bottleneck we have in the network side.

For the IPTV product, yes, our plan was to launch it during the Q -- in early Q2, not even late Q3, as we are expecting now. The problem with IPTV when you have a growth except is new to the market, you have to launch it, I will say perfectly, that's our stand, getting the product in [periodic] phase. Because we currently closed the platform from a technical side and from user experience side, the equipment has been delivered, that setup boxes are also has been delivered to Telecom Egypt warehouses. Now most true [consentible fiber] all of us knows it, which is [OFN], domestic provider through the (inaudible) of company and the other one, which is very familiar, it's [DM Sport], which is for the champion league, which is very famous now in Egypt.

The problems that we finalized most of the domestic content agreement. We finalized most of all of them, and we did sign the first end, it's still building to DM Sport -- we finalized the commercial terminals of DM Sport . Still, we need some regulatory approval. I think some security check also is needed. We are in a fairly mature discussions with all of the governmental authorities to finalize it. We are expecting it to take like less than 1 month to finalize the regulatory/security requirements, and then we will be inviting to co-commerce. Whenever it's ready, we are ready from a technical, commercial offering to protect in the customer care side. Our expectation, again, as I said, within 1 month, it will be the released from the government authorities to be ready for a commercial launch.

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Omar Maher, EFG Hermes Holding S.A.E., Research Division - VP of Telecom [18]

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If I may ask, what sort of specific regulatory approvals are you waiting for? You already have the IPTV license. So is it something that has done with the content provider?

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [19]

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Again, as I said, it might be a regulatory/security. I said, yes, last license. There is some security requirements that we need to make it -- a clearance for it. I think we did already most of the work that's needed, and then it would be ready for commercial launch.

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Operator [20]

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The next question comes from Dalal Darwich from Arqaam Capital.

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Dalal Darwich, Arqaam Capital Research Offshore S.A.L. - Research Analyst [21]

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I just have two quick questions, please. The first one is how much in cost savings are you expecting from the ERP program per year? And the second one is if you can give us some details on the Vodafone dividend policy and whether there's any plan to consolidate or just [close] all the business anytime soon.

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [22]

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So the exact period, as we said before, it's like 2.5 years. And so we are expecting an annual cost savings between EGP 350 million to EGP 400 million per year.

For the second question which is related to Vodafone, as I said before, the current situation with Vodafone will not be -- stay for a long time. I think we did announce it before that we would meet as a group during our visit to London and do that and which has been resulted in the EGP 500 million, issued distribution -- extraordinary dividend distribution. Current status quo, have 2 stage to work on. The first stage is about disclosures and dividend policy. And after they depart with transaction, which we quoted as small place between us and Vodafone, we are working currently with Vodafone to close this topic, which is related to dividends distribution policy is -- might be upward in the shareholder agreement to make it like an obligation based on a free cash flow from Vodafone side. We are working and we are still brainstorming with the group on that, but I think we've also should -- a letter of understandings that we need to make something regarding exposures and dividends policy and related part of transactions whether in -- it's in paper of Telecom Egypt -- I mean it's related to Telecom Egypt side or to the group side.

The answer ultimately is to how to leverage the synergies that we see between this asset. All the options are open for discussions of the group between sell, buy or merge. Again, those options are open for discussion. But we agreed that we need to again close the small issues before we talk about (inaudible). Is there some sort of noncorporation agreement, I mean not a legal incorporation of a legal entities that might happen on the retail side with the enterprise on the digital transformation project also on distribution channel. All of these options are whether to make it on a straightforward way, which is buy, sell or merge or to make it in a nutshell, different -- in an innovative way with some sort of commercial offering and propositions and -- are showing propositions in some market.

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Operator [23]

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(Operator Instructions) We'll now take a follow-up question Alexander Vengranovich from Renaissance Capital.

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Alexander Vengranovich, Renaissance Capital, Research Division - Analyst [24]

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Yes. So my question relates to your free cash flow generation. So based on your numbers, I've seen that in the second quarter, you've had negative free cash flow to the firm. Can you broadly explain the dynamics of the free cash flow volatility between the quarters of the year? And what sort of free cash flow generation should we expect in the third quarter and in the fourth quarter of the year? And the second question here in this connection relates to your target leverage over the immediate term. Do you have any target in mind where you probably will be happy with the existing leverage and will be distributing all the excess cash and dividends to the shareholders?

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [25]

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Again, I will start with the second question. We planned before, as a leverage, a target which is 1.5x EBITDA. But again, we exceeded this target during this year, and we will continue during the second year. As we said before, we speed up the rollout plan for our infrastructure because we have to catch up before the introduction of the 5G from (inaudible). Growth have no actually movement from Telecom Egypt side to keep the (inaudible) costs and (inaudible) in broadband and to make it as quick as possible to push the introduction of 5G. So we have a strong proposition to market and a large footprint in terms of offering to broadband.

Again, after the 2 years of operation, we are expecting to turn back to the 1.5x. And the good news again is that despite all of this debt that we are -- have currently on our balance sheet. Still, we see a strong financial performance of the company. We might have some, what I say, liquidity issue in the company related to the working capital and financing for operation, but we are trying to manage through our short-term facilities.

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [26]

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I'll take the free cash flow question. So basically, what we used to -- free cash flow is a function of CapEx and payables for Telecom Egypt. Our revenue is very steady as well as usually our EBITDA unless we have special projects that usually contribute positively to EBITDA or revenue. However, on a base case scenario, you'll find that free cash flow is basically related more to our CapEx spend.

In the past few years, we have been paying a lot on CapEx. As the CFO mentioned, this will continue for the next 2 years. But we've also -- as a one-off in Q1, we've received the Vodafone dividends of EGP 4.8 billion. That's why you see like a huge volatility between Q1 and Q2. However, besides that, what I also would like to point out is that usually what used to happen in Telecom Egypt is that we ramp up CapEx by the second half of the year. So you'll see in H1 usually a lower number of CapEx. And then by Q4, the bigger numbers of CapEx coming in. This year is very different than usual trend. And you can see that on Slide 14 of our presentation. In H1 of the year, we've spent a lot of CapEx because as Shamroukh just mentioned, we are accelerating the program to finish very quickly the complete fiber -- copper to fiber replacement. And hence, we've seen in H1 a deterioration of the free cash flow to firm.

This is also in line with if you look at the working capital, we've paid a lot of payables as well in order to be able to keep the progress on the investment side.

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Operator [27]

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We'll now take a follow-up question from Omar Maher from EMG (sic) [EFG].

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Omar Maher, EFG Hermes Holding S.A.E., Research Division - VP of Telecom [28]

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I have a follow-up question on -- regarding spectrum. I was wondering if you heard back from the regulator anything regarding the new spectrum allocations. And I remember last quarter, if I remember correctly, we have something regarding the allocation of new spectrum to operate there, and you mentioned something about having submitted your requests or your needs and so did the competition as well, and you were waiting to hear back from the regulator. So has that happened yet? And if you could just explain what type of frequencies or frequency bands you're looking for. Is it something that has to do with the 5G? Because I imagine whatever frequency were allocated during the award of the 4G license was probably sufficient for the needs that you have up until today and probably for the next few years as well.

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [29]

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Yes. We submitted our request for spectrum because we'll never be in a position where this spectrum will lead and we are appointed to take it. Again, now I'm carrying around 30% of our old traffic into our network in terms of data traffic. And this is our chance. We are a data player. We are not competing aggressively in the voice market. And we do not have the appetite because we see how the dynamics in some market themselves. We did not receive any official reply from the regulators' bank. All of what is going back and forth is just some noise from the regulators that more spectrum to be released. It might be during 2019. It might be early 2020. Nothing official has been communicated. Even during our meeting with the regulators, we do not have visibility from the other side regarding this release of the spectrum. For the spectrum that asked for, we have currently a price [mechanism] 180 -- 1.8, I mean, gig spectrum, and do we need an additional to make -- to sustain our quality of the surface for the coming years. Yes. This spectrum would be sufficient for the operation when you head toward 5 or 7 or 8 million customers, but we'll -- we do not want to have degradation with the quality of service we're offering for our customers.

Again, for the 20 meg as well, now we -- most of our customers are coming from greater scale, and we have full coverage on our network, not through our national roaming agreement. We see serious some needs for additional spectrum, the 700 meg as well. We asked for additional 10 meg in the 700 meg. And we asked for a 10 meg again in the 2.5 meg. It is our hope -- we know that we would update the targets for the regulator because we know when it comes to allocation, it's much more lower than we asked for. But to tell you, we will be in a positions where the current spectrum will not be sufficient to keep the quality. Otherwise, our CapEx investment will be much more higher.

In a nutshell, if you're asking me about my opinion for spectrum, I do not see it will happen within this year, definitely. I think if we started communications, serious communications from the other side with the authorities to get the spectrum, it will take like at least 1 year of serious communications from the regulators' side. Hopefully, our team is -- by this time line, I see it would be available to some market, additional spectrum by 2022 where it will be a position for Telecom Egypt to acquire more spectrum when we'll be in a position that we closed most of our debt and we did -- we finalized most of our infrastructure investment in -- for expected network and when we will be in a position also as well to have a critical mass on the customer base. I mean by critical, not necessarily in terms of number, but in terms of data consumptions and the quality of customer. So it happens by -- it happens that from the regulator side that offering some, I am expecting both being in the same or coincide with the time -- the point of time where Telecom Egypt would be in a need, in serious need for more spectrum.

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Omar Maher, EFG Hermes Holding S.A.E., Research Division - VP of Telecom [30]

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Sorry, if I may ask, you mentioned 1.8 gigahertz. This is not the -- what you have in terms of gigahertz, but this is the band on which you have the current spectrum, but how much of the quantity it was?

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [31]

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The 18...

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [32]

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18...

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [33]

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In the 1800 megahertz, we have 5 megahertz in the 1800 and 10 megahertz in the 700.

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Omar Maher, EFG Hermes Holding S.A.E., Research Division - VP of Telecom [34]

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Okay. So 5 on the 1800 and 10 on the 700, and then you're asking for an additional 10 on the 700 and an extra 10 on the 2.5, right?

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [35]

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We asked for 10 in the 1800. We're asking for additional 10 in 700. And we asked for 30 megs, 10 in the 1800, 10 in the 700 and 10 in the 2.5.

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [36]

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How much of this is spend, you have to express in your demand because when it comes on reallocation is much lower. So it's like a placement, you have to work your option.

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Omar Maher, EFG Hermes Holding S.A.E., Research Division - VP of Telecom [37]

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Understood.

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [38]

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And all (inaudible)

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Omar Maher, EFG Hermes Holding S.A.E., Research Division - VP of Telecom [39]

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(inaudible)

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [40]

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15 megahertz? 5 in 1800, 10 in 700.

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Omar Maher, EFG Hermes Holding S.A.E., Research Division - VP of Telecom [41]

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Okay.

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [42]

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And to our catering for 30% of the total track.

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Operator [43]

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It appears there are no further questions at this time. I'd like to turn the call back to our host for any additional or closing remarks.

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Mariam Wael, Pharos Research - Analyst [44]

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Okay. We would like to thank the management at Telecom Egypt and all participants for joining us. Thank you.

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [45]

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Thank you very much, Mariam. Thank you, operator.

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Operator [46]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation.